Paying Plan Benefits to Children, Not Surviving Spouse

Question:        I am planning to remarry and want my 401(k) plan benefits paid to my children upon my death, not to my future spouse.  Do I need a prenuptial agreement to accomplish this?

Answer:          Specific requirements must be satisfied under the Internal Revenue Code for persons who wish for 401(k) and other qualified plan benefits to be paid to someone other than the participant’s surviving spouse. A participant’s spouse must waive the right to receive the participant’s plan benefits by consenting in writing.  The spouse’s written consent must be witnessed by an appropriate representative of the plan or by a notary public. Failing to meet these requirements, your 401(k) plan benefits will be paid to your spouse upon your death, notwithstanding your designation of a non-spouse beneficiary.

Many plan participants mistakenly believe that a prenuptial agreement will protect their qualified plan benefits from being paid to their surviving spouses. Prenuptial agreements are a creature of State law, not Federal law, and are intended to codify a couple’s agreement regarding financial and other matters once the marriage is solemnized. The most common focus of a prenuptial agreement is addressing the rights each spouse may or may not have to the other spouse’s property and income upon death or divorce. Courts have generally ruled that language in a prenuptial agreement executed prior to marriage will not satisfy the specific requirements for waiving a spouse’s rights to receive a plan participant’s qualified plan benefits upon death. To ensure a waiver is valid, a participant should follow the above-mentioned statutory waiver requirements in a document executed after the marriage. 

You should consider transferring your 401(k) plan funds to an individual retirement account (an “IRA”).  Under Federal law, IRAs are not required to be paid to a surviving spouse upon the deceased IRA owner’s death.  If you terminate employment with your employer and are entitled to a distribution of your plan benefits, you can transfer your 401(k) plan funds to an IRA so that the Federal waiver requirements are inapplicable; you do not want to transfer these funds to a plan maintained by your new employer as you will then be subject to the same spousal consent requirements. Alternatively, if you are not terminating employment but you have reached age 59 1/2, your plan may permit you to withdraw the funds in your 401(k) plan. This would enable you to transfer or rollover these funds to an IRA and obviate the waiver requirements under Federal law.  Do note that Federal law notwithstanding, some states may require IRAs to be paid to a surviving spouse so if you reside in a State which imposes this requirement, this strategy may not be viable. At the same time, depending on the laws of the State in which you reside, a waiver of spousal rights in a prenuptial agreement may be sufficient for this purpose.

As a conventional 401(k) plan, your employer’s plan likely does not offer the option to receive plan distributions in the form of an annuity. It is also unlikely that your employer’s 401(k) plan was the direct recipient of assets from a qualified plan that did offer an annuity form of distribution.   If such is not the case, then not only must your spouse be the plan beneficiary, but plan benefits must be paid to you and your spouse in the form of an annuity.  The annuity option can be waived following your marriage, but similar waiver requirements must be satisfied following the marriage. Perhaps of greater concern with plans offering an annuity option is that the withdrawal of plan funds upon attaining age 59 ½ and the transfer of such funds to an IRA will also require spousal consent. You can circumvent this requirement by withdrawing the funds and consummating the rollover before you marry if your plan permits.

Your question is a common one as many persons have inadvertently had their plan benefits paid to their surviving spouses due to the failure to follow the applicable waiver requirements.  Only strict adherence to these rules will allow you to permit your benefits to be paid to your children.

A form of this article was published by Forbes. To view, click here.

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